Shares of DLF gained 4.5 percent intraday to touch a fresh 52-week high of Rs 226.40 on November 25 after global brokerage house Morgan Stanley upgraded the stock to buy, citing reasonable valuation.
The stock gained more than 53 percent in last three months, especially after several government measures including cut in corporate tax rate and funding to stalled real estate projects. It was quoting at Rs 221.55, up Rs 5, or 2.31 percent on the BSE at 1049 hours IST.
"DLF is now our top pick in the industry. Company has a balanced portfolio of development and yielding assets. Power to monetize its land bank is on the rise, led by neighborhood development. However, it remains predominantly leveraged to the NCR region. Our updated model shows reasonable valuation, and we see comfort in asset-based valuation," said Morgan Stanley.
The brokerage house has upgraded the stock to overweight from equal-weight earlier, with a new price target of Rs 269 (target discount to NAV of 25 percent, narrowed from 30 percent), implying 24 percent total return potential from current levels.
It believes that DLF's NAV quality has risen in the last few years, driven by 1) significantly higher contribution from rent-yielding asset portfolio (around 34 percent, Rs 121 per share); 2) large concentrated land bank in the Devco now has a more developed neighborhood, giving visibility to monetization; 3) a few recent land transactions in New Gurgaon/Phase V provide a pricing benchmark; and 4) REIT listing has helped benchmark valuation for DCCDL's large portfolio.
Morgan Stanley has raised its March 2021 forward NAV estimate to Rs 359 per share (from Rs 287 per share for the 12 months ending March 2019).
"We have rolled forward to March 2021, lowered our discount rate to 12.7 percent, and reflected a lower tax rate and project-level updates (including prices and completion timelines). On our forward NAV estimate, the stock is trading at a 40 percent discount, implying close to 1 standard deviation below the seven-year mean," it said.
The brokerage factored in DLF's improved balance sheet, steady earnings visibility from completed unsold projects and near-term pipeline, and the recent industry re-rating.
The research house feels the new asset creation cycle has commenced.
DLF is developing 13.4 million square feet (MSF) of projects for sale (residential and commercial) and 9.1msf of rent-yielding assets (in the DCCDL portfolio). These should get completed over 3-4 years and have potential to generate Rs 32,300 crore in sales and Rs 950 crore in high-quality rental income, said the brokerage which believes execution progress on these assets should help narrow DLF's discount to NAV.
DLF has significantly reduced its net debt over the last three years, driven by aggressive equity dilution. Plus, it has increased rent-generating power significantly.
The company has recently completed a major restructuring spanning the last three years, which included the formation of two separate focused business entities for residential (DLF Devco) and rental assets (DCCDL – 66.67 percent owned by DLF); net debt reduction in Devco – Rs 4,500 crore in Q2FY20 from Rs 27,000 crore in Q2FY18, settlement of DLF to DCCDL dues – Rs 9,300 crore as of Q3FY18.
"DLF has restructured its business model and balance sheet to become a more focused development and rental company. From here, the spotlight will shift towards monetization of its Rs 10,000 crore in unsold completed inventory, leading to positive free cash flow generation (around Rs 500-600 crore per annum from FY21 onwards) and, potentially, further deleveraging," said the brokerage.
"The rental business (DCCDL) has gained scale, with prospects of low-/mid-teens growth from current high base (Rs 3,200 crore in FY20 rentals). The company is starting a new asset creation cycle for both its development and rental businesses. All this, along with reasonable valuation (40 percent discount to our March 2021 NAV estimate) drive our rating upgrade to overweight," it said.
Key downside risks include prolonged slowdown in DLF's home NCR market, including Gurgaon; lower rental/higher vacancy for new rental assets under development, driven by oversupply; slow sales velocity in the completed inventory; rising interest rate cycle, hurting rental asset valuations; and regulatory risks, including whistleblower complaint on QIP disclosures, Morgan Stanley said.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
